Transmission of Risk in a Supply Chain: The Case of the Refinery Industry

• Departmental Seminar
• Environmental and Resource Economics Workshop

Date and Location

Friday, April 3, 2015, 12:10 PM - 1:30 PM
ARE Conference Room, 2102 Social Sciences and Humanities

Abstract

We develop an equilibrium model of price dynamics and the transmission of shocks in a supply chain and determine the equilibrium price process for the input, the output, and the spread between input and output prices. We then present a set of stylized facts about crack spreads and calibrate our model for the case of crude oil and refined products. As we show, the relative volatility of oil and gasoline, as well as their correlation depends on the volatility and correlations of supply and demand shocks, elasticities, the convexity of the production function, and the competitiveness of the refinery market. Our research has implications for understanding the volatility of energy markets, investment incentives and optimal regulation of supply chains, and optimal risk management policies.